Banks raised concerns about a potential rise in the stress levels in the wake of the second wave of COVID-19 infections in a meeting with the Reserve Bank of India today, CNBC-TV18 has learnt. In anticipation of this unforeseen rise in bad loans, several bank chiefs also asked RBI to consider extending the one-time restructuring scheme, according to three people in the know.

The comments came during an RBI meeting with heads of various public and private sector banks through a video conference earlier on Monday. RBI Governor Shaktikanta Das, Deputy Governors MK Jain, M Rajeswar Rao and a few other senior officials of the central bank were present in this quarterly meeting with banks.

“We are worried the second wave (of COVID infections) may further disturb asset quality for all banks, collections are also going to be impacted with lockdowns, but RBI says it’s probably too premature to judge the impact. They told us to wait and watch, and remain prepared,” said the head of a large bank present in the meeting with RBI. “They are fully aware of the situation. We have to see how long the lockdown lasts, how many pockets it is implemented in, how the economic activity is impacted. RBI said it has noted all our concerns, and will do whatever is necessary if it comes to that,” this person added.

“We asked for some relaxations on restructuring. The government has also helped by extending the Emergency Credit Line Guarantee Scheme (ECLGS), so stressed borrowers can take more loans, but some who did not seek recast earlier may need one now. SO we have asked RBI to consider extending the COVID-restructuring scheme by another six months at least,” added another official present in the meeting.

Banks expect the bulk of the additional stress to come from the micro, small and medium enterprises (MSMEs), and the retail book and see a greater need for restructuring permission for such loans. “Corporates may not need more recast help- very few came forward in the first place. But retail borrowers, MSMEs will now need some relaxation so we asked RBI if the scheme can be extended for them,” said the head of a private bank who did not wish to be quoted.

In a research note released earlier today, S&P Ratings said that “systemic risk facing banks in India is likely to remain high in the wake of the second wave of COVID-19 infections and a high proportion of weak loans. This is even though India's economic recovery and steps by the central bank and the government to cushion the effects of the economic crisis will continue to limit stress on the balance sheets of these banks.” It estimates that Indian banking system's weak loans are at 11 percent-12 percent of gross loans. We forecast credit losses will decline to 2.2 percent of total loans in the year ending March 31, 2022, (fiscal 2022) and 1.8 percent in fiscal 2023, after staying elevated at an average of 2.8 percent in fiscals 2016-2021.​

In a press release on the meeting, RBI said in a statement, “In his opening remarks, the Governor highlighted the recent policy measures taken by the RBI to further support the ongoing recovery while preserving financial stability. In this backdrop, he touched upon the importance of credit flows in sustaining the nascent economic recovery and advised the banks to remain watchful of the evolving situation and continue taking measures proactively for maintaining their business continuity, sharpening business strategies and raising adequate capital for strengthening balance sheets. He also emphasised the need for banks to maintain close vigil on the payments and other IT systems operated by banks and fortifying those for enhanced efficiency and resilience so as to offer seamless and uninterrupted customer service.”

One of the people quoted earlier said that RBI has asked banks to proactively raise additional capital, although it seemed largely satisfied with the current level of provisioning. “They have a number for us- RBI wants banks to raise a large amount of capital, but it is a conservative estimate,” said a person in the know. This person did not reveal the quantum of capital raise estimated by RBI.

The other big area of concern for banks was SEBI’s new rules on Additional Tier-1 bonds. After the latest revision in rules, SEBI mandates AT-1 bonds be priced as 10-year paper for the next one year, 20-year for the next 6 months, 30-year for the following 6 and 100-year from April 1, 2023, onward.

“These new AT-1 rules will hamper our capital raising, so we have asked RBI to consult with SEBI on the same and hopefully provide us some relief,” said one of the persons quoted earlier.

RBI’s press note said that progress in the implementation of COVID resolution framework, outlook on stresses assets, capital augmentation, liquidity scenario, monetary transmission, credit flows to different sectors including to stressed sectors, MSMEs, retail, etc were among the key topics of discussion during the meeting.

Another person present in the meeting added that RBI stressed on the importance of banks investing in IT and payment infrastructure, and also asked banks to ensure credit flows to needy sectors to help with growth revival.

(Edited by : Abhishek Jha)

First Published:Apr 12, 2021 8:22 PM IST